Wednesday, January 13, 2010

Time To Close A Telco Tax Loophole?

You may not have heard of a Reverse Morris Trust (RMT) - it's an obscure tax loophole that allows large telecommunications companies to dump assets on smaller weaker companies. In 2007 Verizon took advantage of one, selling off their landline services in Maine, Vermont and New Hampshire to Fairpoint Communications for $2.7 billion and saving $300 million in taxes for themselves. The biggest losers in that deal today are the people of Maine, Vermont and New Hampshire who are now left with deteriorating service after the recent Fairpoint bankruptcy. We've seen similar results in other places - in 2005 Verizon sold off landlines in Hawaii to Hawaii Telcom Communications. Hawaii Telecom also filed for bankruptcy in 2008.

Fast forward to today, the're another big deal in the works with Verizon looking to sell 4.8 million rural landlines in 14 states to Frontier Communications. It is estimated the Verizon/Frontier deal would save Verizon approximately $600 million in taxes due to an RMT. There's been considerable opposition to this deal - here's an interesting quote from a PC World article:

The deal is a "tax scam, at its base," added Ben Scott, policy director of Free Press, a media reform group. In a Reverse Morris Trust deal, the selling company can avoid paying taxes on its sold assets as long as its shareholders end up with more than 50 percent of stock of the buying company.

Tax scam or no tax scam - I'm not knocking the companies - if there is an opportunity to save money it is smart business to take advantage of that opportunity. What concerns me is what this is doing to the quality and growth of broadband services in the United States. We need to start building modern high bandwidth IP-based infrastructure everywhere in our country if we are to compete with the rest of the world. If RMT loopholes remains open, then telcos will most likely continue to expand their dumping of landline services and ultimately hurt us all - not just those living out in rural areas.

U.S. Representative Alan Mollohan (D-WV), is referenced also in the PC World article:

The Reverse Morris Trust deal with FairPoint should be an "ominous" sign for regulators looking at the Frontier deal...... Frontier will have to cut thousands of jobs, and Verizon will walk away with a tax break.....I'd prefer to see that funding go to extend broadband in West Virginia. This [deal] is not in the best interest of our state.

What can be done? U.S. Representative Paul Hodes (D-NH) has announced he will introduce legislation that would reform the Reverse Morris Trust (RMT). I personally believe this legislation is crucial if we are going to modernize the communications infrastructure in our country.

You can get more information on Reverse Morris Trusts, the tax loophole and working to close it at a site put up by linked here. If you agree with what you see there (be sure to also do your own research) you can send an electronic letter via the site urging your member of Congress to co-sponsor Rep. Hodes' legislation.

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